Why Monsoon Still Matters So Much

Apr 19, 2016

The stock market wallahs have been excited since April 12, 2016. On that day, the India Meteorological Department (IMD) came up with the forecast for the monsoon season rainfall for 2016. The forecast this time is that the monsoon rainfall during the period July to September 2016 will be 106% of the long period average (LPA), averaged over the country, with a model error of ± 5%. At 106%, this will be an above average monsoon.

The long period average over the country as a whole for the period 1951-2000 is 89 cm. So the question is how good have the IMD's forecasts been over the last few years? The short answer is-not good.

In 2015, the IMD had forecast a rainfall of 93% of the long period average. The actual rainfall was 86% of the long period average. The actual result was outside the ± 5% model error that IMD works with. When the IMD forecast a rainfall of 93% of long period average, it was essentially forecasting a rainfall of anywhere between 88% and 98% of the long period average.

In 2014, the IMD had forecast a rainfall of 95% of the long term average. The actual rainfall was 88% of the long period average. This was also outside the model error of ± 5%. In 2013, the actual rain was 106% of the long term average, in comparison to a prediction of 98%. This was also outside the model error of ± 5%.

In 2012, the actual rain and the predicted rain were at 92% and 99% of the long period average. This prediction was also outside the model error of ± 5%.

The tragic thing is that nearly 70 years after independence from the British in 1947, the country is still so highly dependent on the monsoon season. As Raghuram Rajan, the governor of the Reserve Bank of India, told the Wall Street Journal in a recent interview: "We're looking for signs of a good monsoon. Unfortunately, India is still somewhat sensitive to monsoons."

So why is India so dependent on the monsoon season? Data from World Bank suggests that in 2012, only 36.3% of India's total agricultural land had access to irrigation. This number would have improved since then. Nevertheless, nearly 60% of India's agricultural land still does not have access to irrigation.

Hence, for water, Indian agriculture is majorly dependent on the monsoon rains. In this scenario, it is important that monsoon rains arrive on time, are well spread over the season and across different parts of the country, which do not have access to irrigation systems.

Once there are adequate rains, the farmers will be able to grow a good crop and then sell it at a good price. (Of course, a good crop does not mean a good price, there are other issues at play as well. But we will leave that for some other day).

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The money that they thus earn will be spent on consumer goods, two-wheelers and so on. This will benefit the companies that manufacture these things, along with those who supply the inputs to these companies and so the multiplier effect will work. For example, more two-wheeler sales mean more sales for tyre companies. More tyre sales mean more demand for rubber and so on. The same logic applies to other inputs that go into making a two-wheeler.

At least this is how the stock market wallahs are thinking. But there are a few caveats that need to be made here. First and foremost, as I said earlier in this column, IMD forecasts more often than not have turned out to be wrong in the last few years. But given that they have made a forecast of 106%, unless they go majorly wrong, the rains this year will be better than the last two years. Second, a good crop need not necessarily mean a good price for the farmer. The agricultural markets around the country still don't function like they should and benefit the trader community more than the farmers.

Third, the agricultural crop that will benefit from the monsoon rains (i.e. the kharif crop) will start hitting the market only in October 2016. Hence, the fillip to consumption (if any) will start happening only around then i.e. in the second half of this financial year.

Over and above this, there is another important point that needs to be made here. Data from the World Bank tells us that in 2014, India's population was 129.5 crore. The population growth rate in 2014 was at 1.2%. Assuming that the population in 2015 grew at the same rate, the population for 2015 comes in at around 131 crore.

Data from World Bank shows that 50% of India's population depends on agriculture. Hence around 65.5 crore out of the 131 crore are still dependent on agriculture. Data from the Central Statistics Office (CSO) shows that in 2015-2016, the total contribution of agriculture, forest and fishing to the gross domestic product (at current prices) was Rs 2,082,692 crore.

Hence, the per capita income of every individual dependent on agriculture, forest and fishing, works out to around Rs 31,797 (Rs 2,082,692 crore divided by 65.5 crore). Now how do things look for the other half which is not dependent on agriculture? Their total contribution to GDP was Rs 101,69,614 crore. Hence, their per capita income works out to Rs 1,55,261 (Rs 101,69,614 crore divided by 65.5 crore).

What these calculations tell us is that in 2015-2016, those not working in agriculture earned nearly 4.9 times those working in agriculture. If we were to use GDP at constant prices (at 2011-2012 prices), the ratio comes to 5.5. Constant prices essentially adjust for inflation. And this huge differential in per capita income between those who work in agriculture and those who don't, is India's single biggest problem. (Of course since I am using averages here, a lot of other issues are getting side-lined, but the broader point remains valid nonetheless).

This also shows the tremendous amount of inequality present in the country between the haves and the have-nots.

Agriculture no longer yields enough to feed the number of people dependent on it. The only solution to this is to improve crop yields (i.e. more production per hectare), ensure that the farmers are able to sell this increased production through a proper market which works and finally, people need to be gradually moved out of agriculture into doing other things.

This is going to be a slow process because people dependent on agriculture simply do not have the required skillset to be moved to do other things, in most cases. Until then we will simply be dependent on monsoon rains.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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My father, when he was an economics student, used to be taught that "India is a gamble in monsoons". When I was a student our economics professor used to hold forth that "India is still a gamble in monsoons". Now I realize that India is a bigger gamble in monsoons than ever before. Of course agriculture has grown and, whether the land is irrigated or not, it is affected by monsoons (floods and droughts). The multiplier effect beautifully explained in the article amplifies this to other parts of the economy. So willy nilly, we have to learn to live in a world which will be more and more prone to vagaries of monsoons.

Also don't write off the IMD predictions so quickly. If you look at a 7% window instead of a 5% one, they have been bang on every single year. This year if we look at the 7% window, we will get somewhere between 99% to 113% of the long term average. Enough to get euphoric about.

This part of 'Asian Continent' is one of the places with "SIX" regular seasons. "Vasanta, Sharad, Grishma, Varshaa, Hemanta & Shishir. PEOPLE of this Place are "NATURE" worshipers. They worship "COWS, TREES, MOUNTAINS & Rivers". They love "HUMANS" irrespective of all characters. Education was donated from this land for every interested person from all over this globe. Things re changing in spite of all the scientific literature still existing. So "Governance" needs to "Revive,Promote & Propagate" the language of "Vedic Literature" in all the States.

If monsoon in financial year 2016-17 is good, it will lead to best agricultural produce and farmers will benefit. That is ok. But farmers are buried deep under debt burden year after year due to draught as well as erratic monsoon. So will they use the money earned now to buy FMCG or use it to clear their debt ? Please give your views.

The author is completely confused between per capita income and per capita production. The Non Agri GDP os INR 101 lakh crore is production. Take Example of ONGC. ONGC's annual production is about 1.6 lakh crore. This is included in GDP. The income goes to corporate and the costs are employee and operating costs and royalty to the Government for the natural resource. The rest is profit and it goes to Government as taxes and to the investors, including the Government as dividend. The rest is kept with ONGC as reserve. Only the employee cost and a portion of outsourced operating cost which are attibutable to outsourced workers can be considered as per-capita income.

Also out of the Non Agri production of INR 101 Crores, about 14 lakh crore goes to Government as direct and indirect taxes. Non Agri per capita income will be much lower than what was written in the article.

Is weather forecasting perfected by IMD ? may be no ! But trust me, it is much profitable to believe in IMD than Equity Analyst, firms recommending stocks based on fundamentals, pundits like Mark Mobius, Jim Rogers and our desi gurus etc. whose predictions about the stock markets/commodities are horribly off the mark and beyond tolerance limits.

We trust IMD, Mark, Jim, etc. because we believe that they more than us. Why do so many people believe in Sadhus, Baba, Gurus ? they give you comfort you are searching for !

Even Vivek Paul, reels-out statistics... I do not know whether Vivek believes IMD or Statisticians (who are better than the Bluffers, I am told..!). Basically, no body knows ANY THING for sure...Suddenly, market wants to go up..... so, it believes in IMD, it believes in INFOSYS & IT...Market believes in RBI-Rajan...etc.....! Suddenly, the Market goes up...! When it chooses not-to...Market goes Down...!What happens to the Analyst? If the analyst predicts -ve, ALWAYS, if it goes down the Analyst is RIGHT...if the Market goes UP.... the Analyst is forgotten.......! So as an Analyst it better for me to CRY -ve..... ALWAYS...!

Good article. I am sure this will article will catch the eyes of the competent authorities to take remedial measures. Let us pray and wish for a good predicted monsoon rain fall this year. Recently our Prime Minister Mr. Narendra Modi has also stressed the need for value addition and use of scientific methods in agriculture to double the income of farmers and making the country self sufficient. He has also suggested that agriculture sector should not be seen in isolation, there should be an holistic approach towards agri sector. Judicious usage of water, fertilizer, electricity etc, soil health, interest subvention on Agri Credit etc are some of the factors which account for boosting farmers' income. The Central Government is also encouraging Agri Sector through budgetary allocations and introduction of e-Agri markets hopefully to enable farmers, traders and consumers to have a fair deal for the Agri produce. Let us all hope for the best.

Vivek, I have never read this analysis before- very important data that shows the stark difference between indians in and outside of agriculture. Thanks for sharing - please keep sharing such important facts!Would also request you to cover the issues in irrigation and possible solutions, and why our government and our farmers are not coming together to fix this issue that has plagued us for years? Why can't we spend money, time and effort on irrigation and capturing rainwater in a way that we do NOT need to be so dependent on monsoon??

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